I generate money each year from early SS(at 60 yrs. old) and interest on an IRA left me by my late Dad. I invested the remainder of the money in 5 year CDs with Ally Bank, and have the interest sent to me monthly.

I have to dip into the principal a certain amount each year. So far, I haven't had to break any of the $10K CDs, but it'll happen sooner or later.

So, each year that there's less principal, less interest is being generated. At the same time, my rent goes up. Once a $10K CD is broken, it isn't simply $240 less income that year, it's magnified by every year I continue living.

Is there anyway for me to calculate things long term, namely, will I run out of money and have to move first to a cheaper area? Can a CPA do that, or a CFP, or even Mint.com or a software program?

I'm sure interest rates will go up again, but at this point, I can't count on that.

Thank you.

Last edited by tcs11705 on Tue Jan 29, 2013 5:13 pm, edited 1 time in total.

You need to calculate your expense run rate. List on a piece of paper or your computer all of your normally reoccurring expenses (rent,utilities,food,phone,insurance,health,car/transportation,etc) and any discretionary expenses you may or may not have. Those are your monthly outflows. Your monthly income is your early Social Security and interest plus any amount of principal you have been withdrawing.

For example - if your monthly expenses are $1,000 and your monthly income plus interest is $500 - your deficit is $500 per month. If the total asset base is $10K - your money will likely run out in less than 20 months (as each principal withdrawal occurs, less monthly interest income is being generated as you stated earlier) - probably between 15 and 18 months to be conservative in this example.

For each successive year, I would take the current monthly expense and apply an inflation factor of say 3% - meaning on average I would expect my monthly reoccurring expenses to increase by a factor of 1.03
If my previous expenses were $500 per month, they are now expected to be $515 per month in the following year.

You could do this monthly if you think you might run out in some modest number of months, 10-20-30.

If you think you might have enough for 10-20-30 years, I'd just do it yearly if doing it by hand rather than by spread sheet.

The unknown is what inflation might be, 3% is an ok guess but you might try other numbers. Your future interest rates are unknown as well, you could play some what if there too for years past your current CDs. The biggest wild card is what sort of emergency spending might come along.

This year figure out your income not from investments. Figure out your interest on investments. Add them to get income. Estimate expenses. The difference comes out on investments.

The do the next year the same way, but this time the interest on investments is less, and likely your expenses are little higher, say 3%. SS will also be 3% higher in your estimate. The difference between total income and expenses comes out of investments.

Then do year three starting from the end of year two after adjusting principle for whatever you took out in year two.

The do year four and so on and see how long the money lasts.

If it does not last very long, you might want to be proactive and get a roommate or move to a cheaper area well before the money starts to run out.

Best of luck.

Rod

We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

Treat yourself to a copy of Excel, if you don't already own one, and a book or two on Excel. Alternately, search online for Excel tutorials.

First, set up a spreadsheet that shows your expenses each year and then subtracts that amount from your CDs. It should also increase your CD balance each year by the interest amount.

Then, start learning some of the Excel financial functions. For example, there's one function that, given an initial amount, a payment amount, and an interest rate, computes the number of payments until the balance goes to zero.

The big advantage of doing it yourself in Excel (besides not costing much) is that it will give you a hands on feel for what's happening with your money. Even if you later decide to get more formal assistance, it will help you to ask the right questions.

It's definitely worth creating your own model using a spreadsheet but, as you've discovered, there's a learning curve, and
if math and/or programming-like tasks are daunting for you you might be better using an off-the-shelf solution.

By the way, if you haven't already, you might consider putting some of your money (15-20%) in a cheap stock index fund
to get potentially better returns which would reduce the chance of running out of savings.

tcs11705 wrote:These are really great, thank you, I'm overwhelmed by so many responses to my first post.

What I neglected to mention is that my rent is going up on average $500/yr. So as that increases, principal decreases, and there's no way to know for certain how many CD's will have to be broken.

I looked at Excel, it looked very complicated, I'll take another look. Maybe OfficeLibre is easier.

I have never used it but you can use the spread sheet in Google docs I believe for free rather than exel if you want. Spread sheets are very good for these things, I recommend you give that a try if you can, but if they intimidate you don't worry. Just do it by hand. If you do it yearly by hand is not very hard. Likely way faster than learning spread sheets.

If you want, just make two types of expenses, just like having two types of income (SS and interest). One would be rent and one would be "other". Other goes up with inflation of say 3% and rent you can have go up by $500K, or by 5% or whatever you want. Add them to get your estimated expense for the year.

We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.